Sunoco 2006 Annual Report Download - page 37

The discount rates used to determine the present value of future pension payments and
medical costs are based on a portfolio of high-quality (AA rated) corporate bonds with
maturities that reflect the duration of Sunoco’s pension and other postretirement benefit
obligations. The present values of Sunoco’s future pension and other postretirement
obligations were determined using discount rates of 5.85 and 5.80 percent, respectively, at
December 31, 2006 and 5.60 and 5.50 percent, respectively, at December 31, 2005. Suno-
co’s expense under these plans is determined using the discount rate as of the beginning of
the year, which for pension plans was 5.60 percent for 2006, 5.75 percent for 2005, 6.00
percent for 2004, and will be 5.85 percent for 2007, and for postretirement plans was 5.50
percent for 2006, 5.50 percent for 2005, 6.00 percent for 2004, and will be 5.80 percent for
2007.
The long-term expected rate of return on plan assets was assumed to be 8.25 percent for
2006, 8.50 percent for 2005 and 8.75 percent for 2004, while the rate of compensation in-
crease was assumed to be 4.00 percent for each of the last three years. A long-term ex-
pected rate of return of 8.25 percent on plan assets and a rate of compensation increase of
4.00 percent will be used to determine Sunoco’s pension expense for 2007. The expected
rate of return on plan assets is estimated utilizing a variety of factors including the histor-
ical investment return achieved over a long-term period, the targeted allocation of plan
assets and expectations concerning future returns in the marketplace for both equity and
debt securities. In determining pension expense, the Company applies the expected rate of
return to the market-related value of plan assets at the beginning of the year, which is de-
termined using a quarterly average of plan assets from the preceding year. The expected
rate of return on plan assets is designed to be a long-term assumption. It generally will dif-
fer from the actual annual return which is subject to considerable year-to-year variability.
As permitted by existing accounting rules, the Company does not recognize currently in
pension expense the difference between the expected and actual return on assets. Rather,
the difference along with other actuarial gains or losses resulting from changes in actuarial
assumptions used in accounting for the plans (primarily the discount rate) and differences
between actuarial assumptions and actual experience are fully recognized in the con-
solidated balance sheet as a reduction in prepaid retirement costs and an increase in the
retirement liability with a corresponding charge initially to the accumulated other
comprehensive loss component of shareholders’ equity. If such actuarial gains and losses on
a cumulative basis exceed 10 percent of the projected benefit obligation, the excess is
amortized into income as a component of pension or postretirement benefits expense over
the average remaining service period of plan participants still employed with the Com-
pany, which currently is approximately 11 years. At December 31, 2006, the accumulated
net actuarial loss for defined benefit and postretirement benefit plans was $309 and $73
million, respectively. For 2006, the pension plan assets generated a return of 13.3 percent,
compared to 8.7 percent in 2005 and 12.2 percent in 2004. For the 15-year period ended
December 31, 2006, the compounded annual investment return on Sunoco’s pension plan
assets was 9.6 percent.
The asset allocation for Sunoco’s pension plans at December 31, 2006 and 2005 and the
target allocation of plan assets for 2007, by asset category, are as follows:
December 31
(In Percentages) 2007 Target* 2006 2005
Asset category:
Equity securities 60% 65% 65%
Debt securities 35 32 32
Other 533
Total 100% 100% 100%
*These target allocation percentages have been in effect since 1999.
The rate of compensation increase assumption has been indicative of actual increases dur-
ing the 2004-2006 period.
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